Thoughts from the Frontline

The Recession of 2011?

By John Mauldin

August 20, 2011

Choose your language

The Recession of 2011?
The Streettalk/Mauldin Economic Output Index
Is There a Recession in Our Future?
The Bright Side of Europe’s Dysfunctionality
The “Treasonous” Fed
Some Final Thoughts
Some Hope and Needed Help, Plus Travels

The data this week was just ugly. Even the uptick in the leading economic indicators, seized upon by so many talking heads, must have a large asterisk beside it. This week we look at the increasing probability that we are headed for recession, and the follow-on implications. Then I take a perilous and speculative journey into the realm of the political, commenting on Texas (and my) Governor Rick Perry’s rather interesting comments about the Fed and Ben Bernanke. There is a lot to cover, and lots of charts, so we will jump right in. But please read at the end about two events coming up in the next few months that you might be very interested in attending.

The Recession of 2011?

It was relatively easy for me to forecast the recessions of 2001 and late 2007 over a year in advance. We had an inverted yield curve for 90 days at levels that have ALWAYS heralded a recession in the US. Plus there were numerous other less accurate (in terms of consistency) indicators that were “flashing red.” (For new readers, an inverted yield curve is where long-term rates go below…

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16 comments

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Gert Deiss

Aug. 27, 2011, 5:03 p.m.

Hi John,

Some comments on The End of the World, Part 1.

I reads like if the Germans finally will have this smart job to bring Europe and finally the world down. Ironically about 65 years after our first attempt fortunately failed greatly. This does not feel to good for a German like me, but that seems to be the way it is.

So my hope is we can do better this time and let me draw your attention away from the ego of those that want to see their incompetence nailed and written in the news. Von der Leyen wants to become successor of Merkel and has never understood anything about economics. Wulff is a pale President, elected more than a year ago. The good thing about him is that he did not say anything at all for about this time, the bad thing is ...

Let me give you this scenario: Yes, Merkel will fail because she is hesitant, is playing poker (not a lack of leadership) and does not understand the dynamics of the situation, probably in September. The coalition partner, the liberals, will contribute to this outcome and will never be seen in the parliament again for years. The good thing is that the opposition, whether it is greens or socialists are very willing to go for Euro bonds. And both would win by miles if we had elections today. 

Three issues there: First, we do not have elections. Second there is no leader left behind Mutti Merkel, who could fill the gap and lead and manage the post Merkel CDU thru with the socialists until election. And third, timing is an issue, as I do not think that the market is gracefull enough to grant enough time for a transition in this volatile times.

What is left is a not to slim chance for a great theatre: Pressure increases, Merkel struggles, is smart enough to skip the liberals and forms a new coalition with the socialist. Stein…. becomes Kanzler (Chancellor ) Eurobonds get issued, Merkel gets a place next to siegfried in the hall of the nation

Dreaming? Probably. Feasible? Of course. I do think most of the Germans have a good feeling of what is at stake and are not generally against Eurobonds (What is it anyway).

Best regards
Gert

Hans Kurr

Aug. 23, 2011, 1 p.m.

Hans Kurr, Aug. 23, 7:01 p.m.

How, John, can cash not become trash, if - as I agree - the “Fed” has indeed run out of con-structive options for dealing with recession…and thus, desperate and under pressure from the President, resorts to yet another, even more dollar-de-structive “Q3”?

Meanwhile, please use the mega-reach of what Reagan would’ve called your “bully pulpit” to let folks in on - and draw their own conclusions from - the still little-known, yet mind-boggling fact that the “Fed” is no Federal Agency, has no reserves and is instead a private for-its-own-profit monopoly with the legal power to print our currency…even into oblivion.  For historical perspective, let folks know that in June 1963, by virtue of Executive Order 11110, President Kennedy essentially stripped the “Fed” of the power his successor LBJ restored right after the November ‘63 assassination.

Gov. Perry’s folly, I’m afraid, didn’t lie so much in how he described the “Fed” as in when. The legatees of whoever removed the 1963 threat to “Fed” power now KNOW Perry poses a new and, given today’s climate, potentially serious challenge.  Common sense says they will spare no pains to try to ensure Perry will not get to sign any “Son of #11110.”

Hans Kurr

Aug. 23, 2011, 10:17 a.m.

How, John, can cash not become TRASH, if - as I agree - the “Fed” has indeed run out of con-structive options for dealing with recession…and thus, desperate and under pressure from the Prez, resorts to yet another, even more dollar-de-structive “Q3”?

Meanwhile, PLEASE use the mega-reach of what Reagan would’ve called your “bully pulpit” to let folks in on - and draw their OWN conclusions from - the still little-known, but mind-boggling fact that the “Fed” is no Federal Agency, has no reserves and is instead a private for-its-own-profit monopoly with the legal power to print - and, if it wishes, destroy - our currency.  For historical perspective, inform your readers that in June 1963, by virtue of Executive Order 11110, President Kennedy essentially stripped the “Fed” of the power his successor LBJ restored right after the November ‘63 assination.

Gov. Perry’s folly, I’m afraid, didn’t lie so much in HOW he described the “Fed” as in WHEN. The legatees of whoever removed the 1963 threat to “Fed” power now KNOW Perry poses a new and, given today’s climate, potentially serious challenge.  Common sense says they will spare no pains to try to ensure Perry will not get to sign any sequel to #11110 or won’t be around long enough to act on it.

Michael Bell

Aug. 22, 2011, 10:36 p.m.

Statistics! Statistics! They work unit they don’t.

I wonder how many of your readers are afraid to say anything at all negative for fear of disappearing in the middle of the night - THAT just might be America’s biggest problem of all!

America the free - are you $hittin’ me???

My last post. See y’all someday in that secret valley somewhere in Colorado.

Evandro Menezes

Aug. 21, 2011, 4:51 p.m.

And then, as a couple of years ago, we’re hearing from Keynesian Nobel laureates that we are in a liquidity trap again, because not enough money was created in the previous liquidity trap.  One even goes as far as to suggest that we pretend that there’s an alien invasion and prepare for it in order to stimulate the economy.  I kid you not.  It may be an opera buff to our ears, but to the ears of the powerful, it’s a sweet song.  Please, will someone tell them that it’s a swan’s song?

julius corazo

Aug. 21, 2011, 3:27 p.m.

From it’s peak in 1929 until 1932, the Dow crashed a cumulative 86%. But starting in 1933, the Dow raced ahead with a 66.7% gain. From 1933 till 1937 the Dow doubled in value. By 1937, the global economy began deteriorating once more combined with political turmoil in Europe (eerily familiar?). The Dow plunged 33% in 1937 and began a 5 year bear market till 1942.

What we are seeing today is history repeating itself just like 1937-38, except this time the accumulated global (private + public) debts are on steroids, especially the U.S. and Europe’s…and the U.S. govt is running out of policy bullets in stopping this downward spiral (including the latest QE2, which was a short term fix at best)...these signposts increasingly point to classic bear rallies we are seeing week after week.

If you’re a day trader or an investor, brace yourself this could be a real wild ride for all equities (regardless the fundamentals) going forward…this explains why more and more large pension funds, here and abroad, are into cash or heavily into bonds, and even treasuries inspite their very low yields and light on equities, they cannot afford to risk losing their very nervous pensioner clients hard earned money.

William Krause

Aug. 21, 2011, 10:51 a.m.

Dear John,

As always your analysis of where the economy is heading makes perfect sense!  I invite you to read the following blog spot from a leading component of Modern Monetary Theory.  MMT is a system of analysis which clearly demonstrates, with data, how fiat money economies actually work.
http://bilbo.economicoutlook.net/blog/?p=15727#more-15727
For the convenience of you and your readers I am reproducing the conclusions that Professor Mitchell draws in his posting….

“...The world economy is slowing again and there is only one reason for it â?? policy makers are being seduced by an economics approach that fails to accord with the way the economic system works.

It fails basic tests â?? like an appreciation that spending creates income. We cannot expect real output to rise when a major component of the marginal growth in aggregate demand is reduced (public spending).

We cannot expect private investment to be strong when consumers are unwilling to return to pre-crisis (credit-driven) consumption levels.

We cannot expect consumers who are saddled with massive debts and/or are enduring entrenched unemployment to bounce back and drive economic growth.

We cannot expect all nations to suddenly experience an export boom which overwhelms the import side of the current account and adds more to aggregate demand than is lost from fiscal austerity.

For all those reasons, budget deficits should be larger at present and governments should be demonstrating up their commitment to full employment and renewed economic growth. The best place to start is to introduce a Job Guarantee â?? large-scale employment creation programs.

Such a scheme â?? putting solid income into the hands of the poor and unemployed â?? would stimulate aggregate demand in essential sectors â?? food, retail, housing, schooling, health etc and within two quarters the recession would be over and investors would start getting bright-eyed again.”
Best regards,
Bill

Nancy Hipp

Aug. 20, 2011, 10:18 p.m.

Simply “thank you!”

Russ Abbott

Aug. 20, 2011, 8:34 p.m.

Are you sure the Fed is “holding down rates on the short end of the curve?” It seems to me the market is doing that.

And with respect to “uncertainty” as the cause for today’s business slowdown, that makes no sense at all. Business won’t hire or invest because there is no demand. It has nothing to do with uncertainty.

There is never any certainty about what politics will bring. Of course it’s even worse now that the Republicans have gone crazy. Who knows what they’ll do next! Stiff our creditors? Shut down the government? I guess that level of uncertainty may make one stand back and wonder if the nation is going to survive.  But then the solution is for the crazies to stop being so crazy.  It has nothing to do with the government “getting out of the way.” High tax/high government activity countries like Sweden and Norway are doing just fine. But then I guess there is some certainty about how their government will act in the future.  I guess that means we need more certainty that the government will be more activist for a while. That would perk up the economy.

Barb Gilmour

Aug. 20, 2011, 8:12 p.m.

Opera buffa, huh.  I feel more as though I am living in Bizarro land.

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